1000 Days - The Business Owners Exit Journey in 10 Charts | Peter Lehrman

Peter: K. I, I confess I've never had walk on music before so bear with me as I grapple with probably the biggest stage of my life. Brent, thank you so much for the opportunity. It's wonderful to be with you all. I've had a great time the last couple days in a lot of interviewing and moderating roles.

What I wanted to do today was just share something that's a 100% organized around owners, as opposed to investment professionals. Data and information that I hope is helpful to people, particularly who are in the first time seat contemplating an exit. Obviously investment professionals don't just buy businesses they often sell those businesses. Maybe they hold them forever but many times they don't. They have more experience in the process.

A first time family owned business, a first time founder owned business doesn't really have those at bats. So this presentation is really organized around serving the owners in the room that find themselves in that situation or may find themselves in that situation. This first slide just so you know they actually fill way more than half the time. What this slide shows you is what happens once you've got an accepted offer from a buyer of your business and you enter into the due diligence period. And just to be clear, the research that I've sort of used to to make these assertions and these claims is a 100% from the axial platform.

So data may be different but in this case we had about a 150 LOIs over the last 2 years and about 50% of them broke. So if you are attempting an exit and you get to the point where you're actually agreeing and handshaking and signing a piece of paper, you plan to sell your business to a given buyer, the buyer plans to buy your business, you still have a 1 and 2 chance if you just look at the odds and spread those out over you know a large number of units. 70% of the failed exits break for due diligence reasons and the due diligence reasons are not rocket science to fix it. I will not the takeaways from this will not be impossible for anybody to implement. It's not difficult to do these things.

You just need to do them, and you can't wait to do them 3 months or 6 months before you want to sell your business that's too late. So it's not rocket science, it's not hard because you know you're an owner that is focused on your business for 20 or 30 years and you're not going to be able to do it, you just need to do this. I don't know how well you guys can see the the breakout charts here but very little of the of the reason why a business sale breaks down is because you know the buyer can't secure financing or or items like that. Usually, it has to do with a loss in the in the ability for the buyer to really be confident that they know what they're buying. And that usually has a lot to do with either financial hygiene or legal hygiene of your business when you get into the diligence phase.

This is before we came out to to Missouri for this conference we surveyed there's about 2,000 investment bankers and business brokers who use the platform to sell businesses. They use our tools and our data and our workflow to to try and run a good sale process for a business. And we we ran a survey when we closed up the survey we had 60 responses these are the 8 avoidable mistakes that we heard most frequently in the survey from m and a advisors who we invited to to answer the survey in terms of the 8 easily avoidable mistakes that break deals. Cleanliness of financials, lack of a formal exit motion in the mind and in the heart and soul of the owner, caginess during due diligence, An inability to really own their numbers during the q and a and the dialogue. You're just not close enough to the business and close enough to the numbers.

Number 5, overly distracted trying to exit the business and therefore not able to drive the business during a 6 to 12 month exit process. Running too narrow a process, not predefining the ideal outcome. What that really means is do you know what you wanna try and drive out of the exit process before you enter into it? Do you know where you're going or are you just sort of leaving the harbor and flying out, you know, sort of sailing out into the Atlantic Ocean and not really sure where you wanna actually take the outcome. What makes that so hard is you don't really know what the number in your mind is, what you would settle for, what's, you know, what what are you solving for?

Right? And so that's where a lot of people don't do the homework in their head as an owner. They don't really know, okay. If I get to this outcome with this kind of partner, I'm happy. You know?

Like, my ship has come in. And then, of course, as the diligence gets intense, it becomes emotional, becomes very easy for people to to get emotional. Right? For for them to get upset, for them to get annoyed, for them to get exhausted. So just be aware of these things.

You can't necessarily prevent all of these things. You can't prevent yourself from getting emotional when you're selling a business. It's it's part of part of the process. You will go through it as an owner. But it always just helps to be aware of these things as you go into it.

The more you know about what to expect, you know the more you can sort of keep yourself composed during you know arguably the most important transaction of your business's career. This chart here just shows that in the minds of m and a advisors who are in the business of trying to sell businesses for a living and who largely make money only when a business is successfully sold not when it you know when the deal breaks down, the great majority of them encounter business owners as being wholly unprepared when they begin to start sort of preparing them and doing work. In other words, just the general sense of readiness that professional advisors have who are in the business of selling companies, small companies, 5,000,000, 10,000,000, $20,000,000 businesses is that, you know, it's almost always less than half of their clients who find themselves ready. So again, just think of you know, there's been so much, so many great sessions this week on managing managers and winning the talent war and, you know, being a media brand and, you know, using software to automate your business. If you don't have an exit planning, if you don't have a little wedge of space in your mind as an owner for how am I going to make sure that my business is exit ready?

What happens if I get a great offer offer next year? Maybe I wanna run my business for another 5 years. But what happens if something happens? If you don't leave time to sort of think about these things, prepare for these things, and execute these things, you're only focused on growth or product or sales, you find yourself all of a sudden at the beginning of the exit race having really never wired it into any of your KPIs or any of your annual goals. So just think a little bit more about what can I do each year to just make sure my business's general level of exit readiness if I want to deliberately exit or if I receive inbound solicitations that are really compelling, how ready am I in the case that that happens?

I'm not gonna go too deep into this one. I just wanted to show the 3 categories. Business under performance during the sale process. This very often happens when people don't have good help and they're trying to sell their business and run their business at the same time. I know it's a little bit of a pithy analogy but I don't think there's very many people in this room who if you sold your house you did all of the selling of your house.

You probably hired a realtor, you probably didn't come home every day from work and manage you know a site visit when someone wants to come to your house. You didn't probably didn't take all the pictures. That's a house sale, this is a business sale way bigger, way more complicated. So usually people make mistakes when they think I can do it all. I was at Patrick and Brent's talk earlier today the q and a in the trenches and Patrick's I guess did not hire a banker and did not hire a lawyer to to sell the OSAM business.

Kudos to him, I believe that's the exception that proves the rule. Don't go into this and think you can do it on your own. Due diligence obviously a big issue, and then just seller readiness and advisor quality. So who have you chosen to retain? Who's working with you?

Who's helping you get ready for this? Who's doing a little bit of this work for you, each year as you sort of think about what your timeline is and how that evolves. I'm gonna skip through these and just make these slides available to you these next few just because I've got limited time, but basically what I did here was just profile specific transactions that were under LOI under LOI at reasonable purchase prices that broke for no good reason. These are deals that we know about because they were originated on the platform, they went under l o I on our platform, we were in touch with the seller and in touch with the buyer and then for a variety of reasons as you can see I've sort of laid them out on the right the business just broke down in the middle of sort of the key loi period. This is one related to due diligence discoveries.

This is just completely avoidable. You could completely have prevented this as the owner of this business. Seller readiness and advisor quality is what we laid out as the sort of the the result here because we try and track these and study these at axial. So this was a case where if you ask the buyer you know what really led to the challenge was there wasn't a great broker representing the seller that made things really hard took a lot of time, and just sort of dragged out and out and out. And as you may have heard, time kills all deals.

You definitely do not wanna be having your your sale process take any more time than it absolutely has to. The longer it takes, the more fatigue you are. The longer it takes, the more fatigue the buy side gets. So the longer your deal takes to close, the harder it is to actually finally close it. There's a there's a a mnemonic in in, in aviation.

There's a lot of mnemonics in aviation but the cigar mnemonic is the one that a pilot uses before they actually go into the cockpit and take off in the plane. They check controls, they check instruments, they recheck gas, they check the attitude of the airplane, and they check the run up, which is the essentially the ability for the airplane to leave the runway prior to the length of the runway expiring or running out of space. And if you look at the way that pilots prepare because the stakes are huge, you don't want to be up in a plane and crash, it's very very checklist oriented. It's it's really the way that aviation safety got built in order to really minimize mistakes was just the discipline of checklist, the discipline of preparation, the discipline of going through the same thing again and again and again. We created a very very easy Nonic at Axial for the business owners who seek our advice on sort of how to get ready.

It's quite simple again nothing I'm sharing is rocket science but the create framework is basically about compatibility, reputation, expertise, availability, trustworthiness, and experience of your advisors. So as an owner there are multiple advisors that you can benefit from retaining when you think about preparing to exit your business. The most well known tends to be the m and a advisor but this framework works for really anybody who you want to have help you get ready to sell your business. I would say that probably the most in they're they're also important but I would say the one that's really really really important is to make sure that they're available. I know it sounds obvious but you don't want to hire a firm.

You want to hire a great person at a firm and you really want to make sure that you're not gonna just work with 1 person on the pitch and then they're gonna disappear for 3 months and you're gonna be working with a whole different team. So go through this process, take your time meeting advisors. There are a variety of advisors that you can bring to bear on preparation and readiness. Obviously you need somebody inside your organization who you can confide in and who you can partner with on the transaction. Then you have m and a advisors, A CPA firm can help you with the financial hygiene risks.

Obviously, an m and a attorney is very different from a general securities attorney. It's a clear place where people make a mistake. They don't hire an m and a advisor. They just work with a general, general attorney and that can make things really really hard. And then what are you gonna do if you have a successful transaction?

How are you planning on managing liquidity? Have you structured your tax plan? So you can use the create framework really with anybody who you're trying to retain to sort of help you with this key aspect of planning and no one else in your organization will do it. It really is an owner's job to do this work. Your VP of sales is never gonna be thinking about this.

Your head of product, your head of ops, it's the owner's job to do this work. This is what the funnel looks like once you're in a sort of a ready place. I wanted just to share a few more charts here. This look each one of these dots is effectively like an attempted transaction and what this shows on the x axis is the size of the of the list of buyers who the seller approached in the context of the sale process. And while it's not always true, it tends to be true that the more conversations you can have either well in advance of a transaction or when you're actively in market, the more signed n d a's you can then process which gets you in a position where you can really begin to talk with large number of buyers.

So generally speaking, you wanna be having more conversations versus less conversations. We do bump into owners a lot who have one competitor or one trade partner who always says, you know, are you ready to sell? Don't put your eggs all in one basket. It's fine to have a conversation with them, but when it comes time to sell more conversations is better than less. This here just shows that if you approach you know on average in these different industries, if you approach 10 buyers or if you approach a 100 buyers, this is the percent that will probably be willing to sign an NDA and enter into initial conversations with you.

So the funnel needs to be very big at the top usually unless you've done a remarkable job of curating a list of interested buyers and hats off if you've done that but usually you really want to actually start wider rather than narrower. Of course there are exceptions to this. These are not rules, they're rules of thumb. As I mentioned in the first couple of slides, you have only entered like you know middle innings when you're under LOI. The reason why a 150 days all the way on the right for sub $5,000,000 businesses is only 15% is because the rest break, so you have a huge survivorship bias here.

If if you have taken 4 or 5, 6 months to try and close a transaction on a $5,000,000 deal when you're under LOI, the great majority of those just fall apart. They just break. And so what this shows you is that if you think you have a deal when a buyer has issued you an LOI and you signed it, you really don't have a deal yet. You have a huge amount of work in front of you. Don't, you know, don't celebrate.

Very quick personal story. In 2014, I raised capital for for Axial and, I had a term sheet and I was in a phase of of leadership leading the company where I thought like transparency is the most important thing. I'm gonna share absolutely everything with my team. You know, no holds barred. It was a very sort of fashionable sort of approach to management and it's it still is and I think there are some merits to it.

I shared with my team that we had a signed term sheet. Term sheet broke 3 weeks later. The whole organization was, like, in panic. It was one of the worst decisions I'd made. I thought a signed term sheet meant, okay, we have a good deal.

We have, you know, we have a real, you know, deal done here, and it'll just be, like, a handful of weeks on basic diligence. It isn't 1 and 2 lower middle market transactions break in the post LOI stage. So gear up for 6 to 9 months. If it ends up being 3 to 6 months, you know, fantastic, but gear up for a lot of hard work once you've signed the LOI. You're not at the finish line.

This is a funnel for a business that was sold, on axial. This is what it looks like top to bottom. 200 buyers approached, 8 bids received, 1 buyer transaction closed at just less than 6 times. So you can see how wide the funnel is at the top and how narrow it gets quickly. This is another example of that.

I will close by just saying rule of thumb, a 1000 days roughly to get ready in terms of financial diligence, legal diligence, building a team, employing some version of the create framework. I sort of bulleted the the the sort of rough timelines for each of these big things, but you can't start too soon. There's great resources on this now. There's great podcasts. Brent wrote a book.

Emily recently published, you know, the the due diligence, checklist that permanent equity uses. That's what you're gonna be up against if you go and, you know, explore transaction with permanent equity or other great firms. So you can be ready. Just do the work. Reserve the time.

It's your job as the owner, and no one else is gonna do it. Thanks for listening. Appreciate it.

This transcript was generated with Transistor AI